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Muni Week Review / Preview 3/14/2016

Tuesday, Mar 15, 2016

U.S. HOUSE DRAFT OF PUERTO RICO AID BILL FAVORABLE TO BONDHOLDERS. MARKETS EXPECT A DECADE OF LOW INTEREST RATES. ATLANTIC CITY STATE TAKEOVER BILL PASSED BY NJ HOUSE.

Republicans Draft Puerto Rico Bill Favorable to Bondholders… House Natural Resources Committee draft legislation, expected as early as next week, envisions Puerto Rico’s path forward to include: (i) a strong independent oversight authority, (ii) audited financial statements, (iii) voluntary debt restructuring, (iv) government reform and fiscal responsibility and (v) market confidence to achieve an end goal of long term economic stability and prosperity. The structure for a Federal Control Board is in the making. Congressman Sensenbrenner, an envoy of Speaker Paul Ryan, met with Governor Padilla and an economic think tank in San Juan. Although specific powers are unknown, Congressman Sensenbrenner’s meetings with the Center for a New Economy offered a glimpse into the possible structure of the Federal Control Board. A Federal Control Board might have power to cancel contracts and union agreements, fire employees, oversee budgets, reform government and renegotiate Puerto Rico debt on a voluntary basis. The commonwealth government is urging that any federal fiscal oversight authority must be paired with debt-restructuring tools and increased federal healthcare funding. House Natural Resources Committee Chairman Rob Bishop met with Puerto Rico Hospitals Association to gauge an increase of federal Medicaid funds to the island. “This is a work in progress, but I think as a result of my visit and House Natural Resources Committee Chairman Rob Bishop’s visit, we are getting there,” said Sensenbrenner. The Congressman noted that House Speaker Paul Ryan has directed both the Natural Resources and Judiciary committees to come up with a bill that can ready for action after Easter saying, “I would like to see a law in place by July 1, at the very latest, and sooner if possible” adding “We want to get something done that would be effective, that will get the island back on its feet again, and end up seeing economic growth.”

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Markets Expect a Decade of Low Interest Rates… World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak markets are betting on developed world interest rates remaining near zero for up to another decade. Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to be buying into a “stagnation” thesis. The market forecast that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth hampered by aging populations and slowing productivity growth means the infla-tion adjusted interest rate needed to stimulate economic demand may be below zero. For all the debate about the accuracy of that view, it’s already playing out in world markets, with long-term projections from the interest rate swaps market showing developed world interest rates stuck near zero for several years. Japan’s main interest rate won’t reach 0.5% for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1% and a decade until UK rates reach that level. “Although interest rates are low, they’re not accommodative,” said a global rates strategist at Citi in London. “The era of zero rates will be with us for years and years, it wouldn’t surprise me if we’re looking at another 5 to 10 years.” The five countries or economic blocs currently with negative deposit rates have yields below zero on all their bonds from a minimum of 5 years to maturity (Denmark) to a maximum of  20 years (Switzerland).


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Muni Bonds Should Continue to Outperform in 2016… The same factors that supported the municipal bond market in 2015, modest inflation, manageable supply, improving financial profiles and consistent demand will continue in 2016. Investors will continue to look for tax free income in the current low yield environment which is expected to continue for years. The Federal Reserve’s plan of gradual increases, if implemented, should not significantly affect municipal bond market fundamentals. The yield curve is expected to continue to flatten and yields are expected to remain low. There is no real threat of tax reform in the foreseeable future. As other asset classes stagnate the tax advantage of municipal bonds will become more and more apparent to “High Net Worth” investors.

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Atlantic City State Intervention and PILOT Bill Approved by NJ House…. New Jersey Senate Budget and Appropriations Committee advanced two bills: The Casino Property Tax Stabilization Act (PI-LOT bill) and Municipal Stabilization and Recovery Act (state intervention bill) that would give the state greater powers to put Atlantic City on a path to fiscal reform. Moody’s projected that passage of both bills could enable the State of New Jersey to shrink Atlantic City’s $102 million structural budget deficit by 73% to $28 million in fiscal 2016 and be nearly wiped out by 2020 by restructuring casino liabilities, shifting to a fixed property tax structure, providing additional aid and cutting city expenses over a five-year period. Other scenarios projected by Moody’s include the passage of only the PILOT bill, considered more palatable political-ly, which could end up leaving Atlantic City’s operating budget in the red by $30 million through 2020. If neither bill is enacted, Moody’s projects bondholder impairment, barring stop gap measures, if the junk-rated city seeks a debt exchange or state approval for bankruptcy. Although Mayor Guardian voiced disapproval of state takeover after agreeing to takeover terms with Governor Christie, 9 of 13 House lawmakers passed the measure.  Senate President Sweeney applauded the PILOT bill, “One of the most important priorities is to protect local taxpayers from bearing the cost of declining revenues caused in large part by the multiple casino closings. The PILOT plan will bring more reliability in local revenue and more predictability for the casinos.” Other local leaders opined on the state intervention bill, “We have to bring responsible financial management and practices to Atlantic City. State intervention is a better choice than allowing the city to go into bankruptcy. Moody’s has predicted that enactment of both bills, which now head for a Senate vote, provide a far-reaching financial turnaround for Atlantic City.

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Chicago Public Schools (CPS)  Seek Damages…“With scarce resources, staff furloughs and painful budget cuts, CPS is keeping a close watch on every dollar,” CPS CEO Forrest Claypool said. Chicago Public Schools on Thursday filed a lawsuit seeking $65 million in damages and losses against its former corrupt in jail CEO, Barbara Byrd-Bennett, and others allegedly connected to trying to defraud the school system in a contract scam. CPS’ announcement of the lawsuit comes the day after principals were told to stop spending money to help the financially battered district stockpile cash as it faces a massive pension payment this summer. CPS has tightened up purse-strings while larger reforms are awaited.

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High Demand For California Bonds… The most-populous U.S. state sold $2.9 billion of general obligation bonds, its first offering of the securities since October and the biggest since August 2013. Tax increases backed by Governor Jerry Brown have helped end the state’s once chronic budget deficits and allowed officials to bolster savings and pay down debt. In July, S&P raised California’s rating to “AA-”, the best for the state since 2001 and Moody’s rates California at a comparable “Aa3”. A few short years ago California was declared bankrupt by ill-informed pundits, today California government revenues for the year to-date period ending February 2016 exceed projections by 2% and are $300 million higher than fiscal 2017 budget proposal. California tax-exempt securities due in 30 years sold for yields of as much as 3.4% or 0.6% more than top rate benchmarks. The Golden State up-sized the bond offering by $600 million due to high investor orders for a large state general obligation bond carrying positive credit metrics.


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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.

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